Showing posts with label #legibility. Show all posts
Showing posts with label #legibility. Show all posts

Tuesday, April 18, 2023

Beyond Market Mantras, and the Benefit-Cost Conundrum in Policy.

Takashi Negishi, 2014

In a brief post today, Brad DeLong, an economist and historian at Berkeley, shared his thoughts on the importance of benefit-cost analysis in policy-making, largely agreeing with Henry Farrell's views. Farrell's argument in question is that the long-held belief that the market knows best has left government policymakers ill-equipped to intervene in the economy effectively. The focus on neoclassical economics in elite US policy schools has resulted in a lack of understanding about how markets actually work. Farrell believes that the price signal cannot convey as much information as previously thought, and some goods are not efficiently provided by market arrangements. He suggests that the assumption that government actors lack the knowledge to intervene has become a self-fulfilling prophecy. To address this issue, Farrell proposes rethinking public policy education to include not only traditional economic reasoning but also new approaches.

DeLong emphasizes that benefit-cost analysis, or "economistic reasoning," is more than just beneficial; it is essential. This approach requires policymakers to count and compare the benefits and costs of a proposed policy, helping them decide what should be done. DeLong also highlights the value of comprehensive benefit-cost analysis, which takes into account all externalities in a system. By driving shadow and real prices towards social-welfare maximizing values, this framework helps conceptualize policy goals. DeLong believes that checking whether these goals have been achieved is the only way to determine a policy's success. However, he acknowledges that benefit-cost analysis has its limitations, particularly in addressing wealth and inequality.

Despite its shortcomings, DeLong argues that considering wealth distribution and its correlation with political power is essential for effective policy-making. Ignoring this aspect could result in policies that threaten the existing distribution of power, which would make it impossible to implement any meaningful changes. In other words, technocracy can only succeed with the support of raw political power. In explaining this, DeLong turns to the work of Takashi Negishi, whose social welfare weights have been controversialy applied in a series of contexts, including the Kyoto Protocol. I had intuitivelly understood Negishi weights for a long time, but this was the first instance where the articulation of it in terms of his scholarship registered with me. I make this note todady as a marker for the future, and a recognition of a nascent idea in an earlier post

Economics and the Mona Lisa Smile.

"Mona Lisa."
Leonardo da Vinci.

The Economist this morning observes that economic forecasting has become increasingly unpredictable, with analysts struggling to accurately forecast many key international measures. Contributing to the confusion are challenges in data collection and interpretation due to Covid-19 disruptions and declining response rates to official surveys. The pandemic caused significant fluctuations in growth, complicating seasonal adjustments in economic numbers. Also, reduced response rates to surveys may have led to increased data volatility and potential bias, as non-respondents tend to be less prosperous, which could distort income statistics. The article uses the ambiguous "smile" of Mona Lisa, painted by Leonardo da Vinci via the sfumato technique, as a metaphor for the difficulty of discerning the true state of the economic environment given this unpredictable data. 

One source of confusion arises from the discrepancy between "hard" and "soft" data—objective indicators such as unemployment rates, and subjective variables like individuals' future expectations. Typically, these two classifications of data are congruent. However, at present, they exhibit a stark contrast. "Soft" measures indicate a recessionary trend, while "hard" measures suggest a reasonable economic expansion. This divergence may be attributed to the public's discontent with inflation. In affluent nations, prices continue to escalate at an annual rate of 9%.

Economic measures really matter for government budgeting, as California's Legislative Analyst's office (LAO) relies upon that data in planning future budgets. Necessarily, many of the points the Economist makes about uncertainty get resolved by the LAO in the "negative" (that is, they accept the more dire forecast). As the LAO (accurately) writes in their 23-24 budget analysis, the U.S. economy experienced rapid expansion from summer 2020 through 2021 due to pandemic-related federal stimulus. However, this growth was (as far as the LAO is concerned, and many others) unsustainable, leading to record low unemployment and supply chain challenges, causing consumer prices to rise 8% year-on-year. To combat inflation, the LAO points out that the Federal Reserve has enacted large interest rate increases throughout 2022. The LAO interprets the hard data it sees, that California is experiencing decreased home and car sales and falling stock prices, as well as weaker state tax collections, and concludes there is a slowdown in the economy. 

The LAO, though, is looking at some of the same data as the writers of the Economist, and thus notes that while overly optimistic projections could result in future shortfalls, an excessively pessimistic projection could lead to premature cuts to public services. Further, despite all the foregoing, the LAO points out that "the state can afford to maintain its existing school and community college programs and provide a cost-of-living adjustment of up to 8.38 percent in 2023-24," which would essentially meet the rate of inflation for educational funding in California. Despite the economy's sfumato, at least that is clear. 

Wednesday, April 12, 2023

The Nature of the Firm and the limits of Economics.

     
Ronald Coase
University of Chicago Law School
via Wikimedia Commons
https://tinyurl.com/26ffzfkp
This week's Economist includes an article by their Free Exchange columnist, regarding the "The Nature of the Firm," Ronald Coase's classic 1937 work. Despite the belief in the 1990s that economics could command a unified science of business, three decades later, it has not progressed in understanding the inner workings of firms. Neoclassical economic theory primarily focuses on markets and the allocation of scarce resources, but it does not account for the fact that much of the allocation of resources in economies occurs within firms, where employees are directed by administrative fiat rather than price signals. The theory that firms are profit-maximizers is also challenged by the reality of "bounded rationality," as no business could process all the information needed to extract maximum profit.

Economists have made strides in understanding firms through concepts such as team production, incomplete contracts, and the principal-agent problem. However, these theories still fall short of providing practical advice on corporate strategy. Economics often fails to capture the importance of corporate culture, shared values, and pride in the workplace, which are essential to a flourishing business. Moreover, economics is limited in its ability to address the specificity of business problems, as they require detailed knowledge of various fields outside the discipline. While economic ideas can offer some insights, the study of business remains an outpost that economics is unlikely to conquer fully.

It was beyond the scope of the article, but a government agency (or, as a shorthand, an "agency") can also be viewed as a firm responsible for providing public goods or services and implementing policies. Like traditional firms, government agencies coordinate resources and make decisions under the principle of "bounded rationality." The major difference is that these agencies differ in their objectives, as they aim to maximize social welfare and address market failures, rather than seeking profit maximization, but which I would note, makes the insights of the Free Exchange column even more trenchant. Further, because government agencies also face unique challenges in terms of bureaucracy, political influences, and accountability, their efficiency and decision-making processes are even less susceptible to an economics-based analysis. 

While apocryphally attributed to Twain, William S. Burroughs' advice to "write about what you know" leads me to look at my home in light of this. I note, over and over, that the critical issues my community encounters are almost always decided in an interchange and an interplay between firms and agencies. If anything, economics is something of a base meridian used to calibrate during the continuing conversations with multiple actors that are directed by fiat using bounded rationality to either pursue profit or improve social welfare, a problem only marginally susceptible to economics-based analysis. 

Almost all of the important questions instead require detailed knowledge of various fields outside of economics. Indeed, to the extent that economics is used after the point-of-reference stage, it is of limited utility by itself. The dozen other factors noted above, including but not limited to corporate culture, shared values, pride in a workplace, bounded rationality, team production, incomplete contracts, the principal-agent problem, political influence, bureaucracy, accountability, market failure, and social welfare, are generally the factors to address in any analysis of the (for lack of a better phrase) political economy of most local decision-making that I have encountered -- a nice checklist for future reference. 

Sunday, October 20, 2019

@TheEconomist on Alcohol and Health.

"A Sober Brawl," available at https://shrtm.nu/8Jwl
Sources: “Drug harms in the UK: a multicriteria
 decision analysis”, by D. Nutt et al., The Lancet;
 “How dependent is the alcohol industry on heavy
drinking in England?” by A. Bhattacharya et al.,
Addiction; Centre for Responsive Politics; NHS
A brief piece this week, on the Economist's "graphic detail" item.  "Vaping" has been in the news, with ancillary reporting relating to tobacco and smoking. The newspaper points out, however, that it is alcohol that causes far more harm, and further illustrates (troublingly) that industry profits are based on the dependency of problem drinkers.  Should all who drink at hazardous or harmful levels moderate, the price rises necessary to maintain profits would be significant.

True, firms engage in public messaging to the contrary. But it appears public health officials question their commitment.  The article points out that the National Institutes of Health recently stopped working with the industry as a consequence, as did the World Health Organization. Perhaps sensing the danger, lobbying spending by alcohol firms has been on the rise. It now exceeds that of the tobacco industry by 31%.

image available at http://tinyurl.com/qh8ww2f
It's not the way we think about these things in the northern part of the San Francisco Bay Area, where so many wineries (and increasingly distilleries and breweries) find their homes. We think of the beauty of the orderly rows of vines. "Living on a vineyard" evokes a mental flash of magic and starlight, hopefully in some way both natural and sustainable. Further, such vistas are reminiscent of James Scott's legible forests -- suggesting, to borrow from David Brooks, that our desire for ordered rationality has found symmetry in our cultivation of the natural environment where we reside.

Yet the industry those rows of vines serve has its problems. To paraphrase Brooks, the highest form of wisdom is balancing the networks that shape our reality by perceiving, evaluating, and acting upon evidence.  Doing so means recognizing that the beauty of Napa and Sonoma, as ever, can come with an uncomfortable cost. Per the bard, roses have thorns, and silver fountains, mud, while clouds and eclipses stain both moon and sun. Sobering thoughts indeed.

Friday, July 11, 2014

@nytdavidbrooks, today is your best column ever.

David Brooks, writing in the New York Times today, wrote just about the best column I think he's ever come up with.  He starts with a distinction between baseball and soccer as cognitive metaphors for understanding modern life, and comes down decidedly on the side of soccer.
"Baseball is a team sport, but it is basically an accumulation of individual activities ... soccer is not like that ... [soccer] is defined by the context created by all the other players ... [m]ost of us spend our days thinking we are playing baseball, but we are really playing soccer. We think we individually choose what career path to take, whom to socialize with, what views to hold. But, in fact, those decisions are shaped by the networks of people around us more than we dare recognize."
Welcome to the party, sir.
image available at http://tinyurl.com/qh8ww2f
"Once we acknowledge that, in life, we are playing soccer, not baseball, a few things become clear. First, awareness of the landscape of reality is the highest form of wisdom. It’s not raw computational power that matters most; it’s having a sensitive attunement to the widest environment, feeling where the flow of events is going. Genius is in practice perceiving more than the conscious reasoning."
This is legibility via the back-door.  Brooks is arguing that value lies in awareness of the contours of the forest, rather than reshaping it to be "computable" (or presuming that it is legible in the first instance). This is a clarion call for evidence-based evaluation of reality, rather than the computation frame of thinking.  That concept's come up here before (and again here).
"... [s]occer is like a 90-minute anxiety dream — one of those frustrating dreams when you’re trying to get somewhere but something is always in the way. This is yet another way soccer is like life."
"Red on Maroon" (1959)
Mark Rothko (1903‑1970), Tate Modern
available at http://tinyurl.com/ohsovbl
This is Rothko's Red on Maroon -- a gateway through which one may struggle to pass, to a
destination unknown. A blocked portal, through which you're not even sure you want to go, knowing only that you feel little choice, on a path you sense will be fraught with danger, danger that we fear (which came up here).

Sometimes you want to just acknowledge the quality of another's writing, and while Brooks' often doesn't resonate with me like it once did, I think his time spent leading a writing seminar at Yale University may be paying off ...